Download - Marketing Mix Priced Op 08
The Marketing Mix
Hillary Jenkins, Otago Polytechnic
Pricing
• What is meant by a pricing strategy?.
• Identify the key determinants for pricing policy decision
making.
• Identify the different methods available for pricing
products and services.
• Explore how pricing strategy fits in with other elements
of the marketing mix.
Introduction
• Marketing is defined as:
– “The management process responsible for identifying, anticipating and satisfying customer requirements profitably.”
– The key words in the definition in relation to the Pricing Policy are:
• Customer Requirements.
• Profitability.
Introduction
• The prices a company sets for its product and
services must strike a balance between
– gaining acceptance with the target
customers and making a profit for the
organisation.
Pricing Strategy
• The first thing which we must define, is what is
meant by price.
• Price is defined as:
“The amount in money for which something is
offered for sale.”
Pricing Strategy
• A Pricing Strategy is defined as:
• A plan which determines the best (at the time of making) pricing decision.
“The planning of prices, including the setting of
discounts, in considering items such as the price of
competitive products, manufacturing and
distribution costs, the firms growth and profitability,
customer wants, and the elasticity of demand.”
Pricing Strategy
• When setting prices we must consider:
– Whether to discount or not.
– The price that the competition charges.
– The cost of providing the product or service.
– The company’s market position e.g. is it a market leader.
– The type and nature of demand e.g. if an increase or a decrease in price will effect amounts purchased.
– The market segments we are seeking to attract.
Pricing Strategy
• It must be remembered, that price is a key element in the marketing mix because -
– for a profit motivated company, it relates directly to the total revenue, and ultimately the profit of the business.
Profits = Total Revenues – Total Costs
Profits = (Prices x Quantities sold) – Total Costs
OR
The Key Determinants for Pricing Strategy
• The key determinants of pricing decisions are:
– Organisational and Marketing objectives
– Pricing objectives
– Costs
– Other marketing mix variables
– Legal and regulatory issues
– Competition
– Buyers perceptions
– Consideration of intermediaries (retailers, wholesalers)
Factorsinfluencing
priceselection
Factorsinfluencing
priceselection
Firm’s overallobjectives
Marketing & Sellingobjectives
Acosts• distribution costs• promotional obj / costsTotal costs
Competitors’ pricingbehaviour and type
Market demand / perception
Legal / regulatoryrequirements
Pricing Strategies
• Quantity or trade discounts
• Cash discounts
• Freight costs
• Flexible pricing
• Price lining
• Leader pricing
Quantity or Trade Discount
• Quantity discounts:
– Deductions from a seller’s list price that are offered to encourage customers to buy in bulk
– eg. Buy a particular resort package – children fly free
• Trade discounts:
– Reductions from the list price offered to buyers in payment for marketing functions that they will perform
Cash Discounts
• A deduction granted to buyers for paying by cash
or within a specified time.
– They are usually calculated on a net amount
due after first deducting trade and quantity
discounts from the base price.
Flexible Price Strategy
• With a flexible – price strategy, similar customers
may each pay a different price when buying similar
quantities of a product.
– Trade-in
Price Lining
• Involves selecting a limited number of prices at
which a business will sell related products.
– A shoe shop which will sell several styles of
shoes at $69.95 and another group at $89.95.
Leader Pricing
• Temporary cutting of prices on a few items to attract customers
– Gotta Go Flights
• You own a fast food restaurant chain and are considering selling your product at below cost price for a short period of time. Why would you do this?
Activity
Feedback
• This is known as a tactical price reduction and may be introduced for a short period of time, even if it does not cover all costs.
– To temporarily match the competitor's prices
– To generate substantial cash flow.
– To increase market share.
Buyers Perceptions
• The marketer must consider the importance of price to the customer in the target market segments when setting prices.
• Try the following activity to illustrate this:
• You have been given the job of pricing two new products as follows:
• Product A – Budget hotel room Target – Families
( Lower middle to low income)
• Product B – Luxury hotel room Target – Business People ( High to middle income )
• How important will the price be to the target customers?
• PRODUCT A
• PRODUCT B
Activity
Feedback
• Price will be very important in both markets as follows:
– PRODUCT A
• Price must be reasonable or cheap to reflect the nature of the product on offer.
• Price will often be the first consideration of the target customers – value for money is key.
Feedback
Price will be very important in both markets
PRODUCT B
• Prices here will be much higher but price is just
as important to the business traveller
• It must be high enough to give a “quality”
impression but competitive in relation to other
luxury hotels.
Feedback
• Prices of products and services are key in both
budget and luxury markets.
• It is possible to overprice and underprice in both
examples, in the eyes of the customer.
• It is also important that the price reflects the other
elements of the marketing mix.
Competition
• Companies who are selling products and services
in competitive markets try to win customers over
from rival companies.
• This is achieved in one of two ways:
– PRICE COMPETITION
– NON PRICE COMPETITION
PRICE COMPETITION
• This involves offering the product or service at a
lower price than that of its competitors products or
services.
NON PRICE COMPETITION
• This involves the company trying to increase
market share of its product or service by
– leaving the price of its product or service
unchanged but by persuading the target
customers of the superiority or advantages
associated with it.
• Whether a firm uses price competition or non price
competition, depends on the state of the market.
– In a very competitive market place, the firm is more likely to
have to resort to intense price competition to sell their products
and services.
– In an non-competitive market there is little to be gained from
price competition and firms tend to concentrate much more on
non price competition (example)
Competition
• It is always important for a firm to predict what the competition may do if prices are changed.
• Example:
– You are in charge of pricing of hotel rooms in a large group in a highly competitive market. You are considering a tactical price reduction in an attempt to gain market share. What may the competition do to respond?
Competition
• They could respond to your tactical price
reduction in a number of ways:
– Do nothing (highly unlikely).
– Reduce their prices to the same level as yours
(or even lower!).
– Try and stress their advantages and superiority in
the market place.
– the position they are in particularly in relation to
cost structure and market power.
– It is important, however, that you predict the likely
outcome of your temporary price reduction.
– If the competition is very responsive, it may do
little to your overall long term market position
• merely generate some extra short term cash flow.
Their reaction will depend on
Legal and Regulatory Issues
• The marketeer is often restricted in the setting of
prices by legal and regulatory issues.
– Government intervention. Price controls.
– Legal restrictions on price fixing and collusion
• The Commerce Act 1986
– Consumer Legislation
• Fair Trading Act 1986
The Different Methods of Pricing
• The way in which prices are derived, depends on
the company’s pricing policy.
PRICING POLICY
• “A pricing policy is a guiding philosophy or course of
action designed to influence and determine pricing
decisions.”
• Once the company has decided on a pricing policy,
it must then choose a pricing method.
– “A pricing method is a mechanical procedure for
setting prices on a regular basis.”
PRICING METHODS
• Cost Orientated Pricing
• Demand Orientated Pricing
• Competition Orientated Pricing
Cost Orientated Pricing
This is where the price of a product or service is calculated
and a margin applied to derive a selling price
– This is the simplest method of pricing and is often used
by companies for calculating prices.
– It has the disadvantage of not taking into account the
economic aspects of supply and demand and often
does not relate to pricing objectives
Demand Orientated Pricing
• This method allows for high prices when the
demand is high and lower prices when the demand
is low, regardless of the cost of the product or
services.
– Demand orientated pricing allows a firm to make
higher profits as long as the buyers value the
products above the cost price.
Competition Orientated Pricing
• The firm fixes the prices of the products and
services in relation to the competitor’s prices.
• This has the advantage of giving the firm the
opportunity to increase sales or market share.